top of page

Distribution Supply Chain Financing in India — Saison Capital

Chris, Chia and myself took a dive into Supply Chain Financing this month, exploring the fast growing distribution financing sector in India deeply. We discovered two models that we were excited by, distributor-led and marketplace-led financing, uncovering the characteristics we think underlie why each of these models succeed and why we, at Saison Capital, are super excited to work with founders in this space.

What is Distribution Financing?

Distribution Financing is a structured programme through which a bank/financial institution (FI) offers short term working capital facilities to the distribution chain stakeholders i.e. corporates, their distributors and retailers, while working with the upstream players for distribution, credit underwriting, etc. Distribution financing helps reduce risk to upstream players by shortening their receivables cycle and increasing the loyalty of their downstream customers while also helping downstream players avail of more and longer credit lines.

In the FMCG sector, retailers generally receive inventory credit of 7–10 days, meaning that they have to pay back the cost of the inventory within that time. The credit size and tenor length are often limited by the upstream party’s own cash flows and liabilities. An FI can provide distribution financing to the retailer through a larger loan or longer tenor, increasing the retailer’s turnover.

Overview of traditional distribution supply chain financing

Banks generally have programs to finance the first leg of the distribution supply chain: manufacturers to large distributors. These distributors are very large, digitized, have good accounting practices and are located in urban areas.

Schematic of distribution supply chain and financing methods available at each layer

However, the lower part of the chain, smaller sub-distributors and retailers (often in rural areas) is not served by banks. These players are geographically spread out and have smaller volumes so they are not lucrative for large lenders. This provides an opportunity for tech-enabled platforms that can aggregate enough volume to make it profitable to lend to them.

Modern (tech-enabled) distribution financing

Underneath distribution financing, we see generally 2 models:

1. B2B e-commerce marketplace with bundled financing

2. Distributor-led retailer financing

B2B e-commerce marketplaces

This model arose almost 2 decades ago with the rise of IndiaMART and has recently gained traction through players like Flipkart’s logistics arm, Udaan (which has raised almost a billion dollars), etc. Tracxn lists almost 800 B2B e-commerce platforms in India alone. However, due to the concentration of logistics in urban India, so far we have seen this model serve mostly Tier 1 and 2 cities.

Why did B2B e-commerce arise now?

The maturing logistics industry and increasing digitization of MSMEs in India led to the exponential growth of B2B e-commerce in India. Firstly, players like Delhivery, Flipkart etc. acted as a forcing function to mature the point-to-point logistics space in India. This meant that logistics companies were now able to deliver goods faster, cheaper and more reliably than before. Online shopping through Flipkart, Amazon etc. also became popular, which led to retailers in underserved industries asking why they could not order their business inventory online just like their personal goods.

Secondly, the twin arrivals of Jio and GST after 2016 meant increasing digitization and Internet usage among retailers. Within a few years, we have gone from computers being a rare sight at most small businesses to savvy business owners using every aspect of the web to improve their business. Startups like Khatabook are an example of the hypergrowth this has enabled.

How does the financing model work?

Traditionally, retailers have received inventory credit at the point of delivery. However, in the B2B e-commerce model, since the distributor is removed from the equation, the marketplace entity steps in to provide financing to the retailer. We see this happening directly (if the marketplace also has a lending license, in the case of Udaan) or with the marketplace acting as a platform to connect lenders (like ZestMoney or EPayLater) to the retailers.

To begin with, the underwriting decision is made on traditional metrics and documents provided by the retailer like bank statements, property documents etc. However, as the retailer performs more transactions and builds up a history on the platform, they are able to get benefits like lower interest rates, longer credit tenors or higher ticket sizes. This, in turn, increases the switching costs for the retailer and builds up a moat for the e-commerce platform.

Trends in the B2B e-commerce and financing space in India

  • The logistics sector is still relatively inefficient in India: McKinsey Research estimates that logistics costs in India are ~14% of GDP compared to ~8% in developed markets while the World Bank ranked India 44th in the world in its Logistics Performance Index. This has forced companies like Udaan to build distribution and fulfillment centers themselves. However, they still face the challenges of high return rates and quality control issues.

  • Logistics costs increase and reliability decreases as we move away from urban areas: This has led to the e-commerce players focusing mostly in the tier 1 and 2 urban areas of the country.

  • Companies are increasingly focusing more on their financing activities as a differentiator and profit-source: Udaan earns almost 4x from its financing activities than from the sale of goods while OfBusiness makes two thirds of its revenue from lending. Recognizing that they were perhaps losing customers due to this, IndiaMART has also started experimenting with credit offerings on their platform.

  • Vertical specific challenges have prevented truly horizontal players from emerging: While IndiaMart and Udaan have expanded to many verticals, most of their business still comes from their top verticals (food and FMCG accounted for almost 50% of Udaan’s revenue). During the Covid lockdown, Udaan dropped most of their verticals and focussed on their core service areas of food, FMCG and pharma. Another player, Shoekonnect, which specializes in the footwear space, has expanded into other verticals, with unproven success. On the other hand, horizontal players like Wydr and Shotang have shut down.

We believe that the B2B e-commerce space will expand rapidly in specific verticals as companies build up logistics expertise and get deeper underwriting data about their retailers. The entry of new, well-funded players like JioMart with expertise in both logistics and financing is likely to induce more competition and increase the efficiency in the sector, which will ultimately be beneficial to the consumer.

Distributor-led retailer financing

Traditionally, retailers in India have relied on local distributors to supply them with their inventory. These distributors in-turn get their inventory from larger distributors, eventually creating a multi-tiered supply chain. The varying demands in different regions, specific logistical requirements, and other capital constraints have created niche markets for each distributor to serve. This system is particularly well-adapted in the FMCG space which serves even the remotest corners of the country and where the chain can extend up to twelve tiers.

Faced with the challenge from the B2B e-commerce players, existing distributors are looking to improve the services they provide to their retailers, including access to more and better credit. The distributor-led financing model uses the distributor’s existing logistics capabilities, deep relationships with the retailers, as well as detailed knowledge of the retailer’s needs to provide financing to the retailer.

How does the model work?

Traditionally, the retailer’s ability to get credit depended on their relationship with the distributor as well as the distributor’s cash flow situation. Frequently, despite having good relationships, smaller distributors are not able to extend enough credit even to their best retailers due to their own cash flow issues.

The distributor-led financing model steps in here by providing a tri-party platform connecting lending institutions, distributors and retailers. When the retailer needs to finance their inventory, the platform uses historical data from the distributor to underwrite the loan. The distributor also serves as a guarantor for a portion of the loan which also reduces the risk for the lending institutions.

We have seen multiple exciting models in this space that vary the type of loan, the role of guarantees, the type of underwriting, the method of collections and the source of funding.


  • Retailers have consistently demanded higher ticket loans and longer credit cycles as rural awareness and consumption of consumer goods has increased. We have seen a proliferation of startups that cater to this demand (e.g. Indify, LendingKart and the government’s MUDRA scheme).

  • Manufacturers are also keen to strengthen their distributors since their profit margins are a lot higher through the distribution channels than through the e-commerce channels. However, manufacturer credit programs are usually limited to the top layers of the supply chain and rarely trickle down. In addition, historically rural supply chains have been susceptible to fraud and revenue leakages — making large manufacturers reluctant to spend their marketing budget in these areas.

  • Since this model relies on the distributor’s traditional supply chain built up over many years, it is able to penetrate the peri-urban and rural areas that B2B e-commerce has not been able to tackle yet.

Unviable unit economics, education of retailers, and lack of digitization are some of the obstacles that may hamper the ability to underwrite smaller retailers. However, through efficient execution and accurate underwriting models, we are seeing some successful implementations of these models eg. Progcap and Bridge2Capital.

Which verticals will B2B e-commerce scale in?

Due to the differing strengths of each model and the huge size of the market, we believe that both models will co-exist in India, with each model being successful in different sectors and geographies. The biggest factor in determining the success of the model is the relationship between the manufacturers, distributors and retailers.

This chart lists some of the characteristics of the industries where each model is likely to be successful and some examples.

In verticals where the manufacturer — distributor — retailer relationships are relatively weak, we are likely to see B2B e-commerce dominate whereas in verticals where these are strong, we are likely to see distributor-led extension financing succeed. We believe these relationships are particularly strong in the FMCG and consumer durables spaces and are excited to see how companies can take advantage of these opportunities.

At Saison Capital, we are actively exploring this space that we believe has the potential to grow to serve the needs of the $1 trillion Indian retail market. Please feel free to reach out with any exciting business models that I may have missed or even just to have a chat @!


bottom of page